This Premium Outlets mall in Mirabel, Que., is owned by Simon Property Group, which is held in some REIT ETFs.
Investors seeking the benefits of an income property – but not the hassles of being a landlord – might want to check out real estate investment trusts (REITs).
A public REIT, which provides regular payouts, is an investment portfolio that can own different types of real estate, such as apartments, malls and even cellphone towers leased to telecom giants.
But investors can become even lazier landlords if they instead own exchange-traded funds (ETFs) that hold a basket of REITs. These investments have attractive yields because they distribute most of their taxable income to unit holders. Rising interest rates are a risk, but central banks in Canada and the United States are keeping a lid on them for now.
We asked three ETF experts for top picks among Canadian- and U.S.-listed REITs.
Edmund Fernandez, ETF and mutual fund analyst, Industrial Alliance Securities Inc.
The pick: CI First Asset Canadian REIT ETF (RIT-TSX)
Management expense ratio (MER): 0.90 per cent
This actively managed, Canadian-focused ETF is worth considering because it is overseen by portfolio manager Lee Goldman, who has had a strong track record investing in real estate assets, says Mr. Fernandez. Launched as a closed-end fund in 2004, it converted to an ETF in 2015. The fund, which has a yield of 4.62 per cent, has long provided more downside protection than its passive index peers, he notes.
The two largest holdings in the ETF – Canadian Apartment Properties REIT and Killam Apartment REIT – make up less than 5 per cent of the fund. For comparison’s sake, the top three names in the S&P/TSX Capped REIT Index make up a weighting of almost 40 per cent; CI First Asset Canadian REIT, which can invest up to 30 per cent outside of Canada, has outpaced that index over three, five and 10 years. The ETF’s fee, which is higher compared with its index-tracking peers, is reasonable due to its experienced management team, he says.
The pick: Fidelity MSCI Real Estate Index ETF (FREL-NYSE)
MER: 0.08 per cent
This ETF is suitable for investors seeking broad-based exposure to U.S.-listed ETFs through a low-cost, passive-index strategy, says Mr. Fernandez. This fund’s 0.08-per-cent fee is one of the most competitive among REIT ETFs, and “over time, savings from these low fees can really add up.”
The fund, which pays a 4.8-per-cent yield, owns large- to small-cap securities in the U.S. real-estate sector, he says. This highly diversified ETF has 180 holdings, ranging from cellphone towers to shopping malls and storage facilities. Top names include American Tower Corp., Simon Property Group Inc. and Crown Castle International Corp.
Although this ETF is weighted by market value, there is less risk in having high concentration in a few names versus some of its Canadian peers, he says. “The top 10 holdings of this ETF make up close to 40 per cent of the portfolio.”
Daniel Straus, head of ETF research and strategy, National Bank Financial Inc.
The pick: Vanguard FTSE Canadian Capped REIT ETF (VRE-TSX)
MER: 0.39 per cent
This ETF offers more diversification in the Canadian real estate sector than pure-play REIT ETFs, says Mr. Straus. Although REITs make up nearly 80 per cent of this Vanguard fund, the rest is invested in real estate development companies and related commercial services. The fund’s 18 holdings include RioCan REIT and H&R REIT, as well as First Capital Reality Inc. and Colliers International Group Inc.
Although the ETF’s 3.58-per-cent yield is the lowest among peers in the domestic real estate sector, its total-return performance hasn’t suffered, he notes. Since its inception in November of 2012 to April 30 of this year, this REIT has returned an annualized 7.75 per cent compared with 6.52 per cent to 7.04 per cent for its Canadian peers, he says. This ETF’s 0.39-per-cent fee, he says, is the cheapest among Canadian REIT ETFs.
The pick: Schwab U.S. REIT ETF (SCHH-NYSE)
MER: 0.07 per cent
This U.S.-listed ETF will appeal to cost-conscious investors because its 0.07-per-cent fee makes it the cheapest REIT ETF in the world, says Mr. Straus. The ETF, which was launched in 2011, tracks the Dow Jones U.S. Select REIT Total Return Index. It owns 96 U.S. REITs and real estate operating companies. Top holdings include Simon Property Group, Prologis Inc. and Welltower Inc. The ETF’s current yield is 2.85 per cent.
The U.S. REIT market, however, can be “pretty volatile – generally more so than the broader market and with lower overall growth potential,” he notes. Higher volatility should be expected from investing in a narrow market sector, he adds. Investors might take a shorter-term, tactical approach to owning this U.S. REIT ETF when they are bullish on the health of the economy, he suggests.
Karen Tsang, ETF analyst and associate portfolio manager, Forstrong Global Asset Management Inc.
The pick: iShares S&P/TSX Capped REIT Index ETF (XRE-TSX)
MER: 0.61 per cent
This Canadian REIT ETF is suitable for retirees and other investors seeking a stable and attractive yield, says Ms. Tsang. The fund has a 12-month yield of 4.46 per cent. “The current low-interest-rate and low-inflation environment is favourable for real estate investment in general,” she adds.
This ETF, which was launched in 2002, is the oldest and largest domestic REIT ETF with $1.3-billion in assets. Because it holds 19 REITs and uses a market-cap-weighted index methodology, there is risk from overconcentration in some names, she notes. For instance, RioCan REIT, the largest holding, makes up 14 per cent of the fund.
REIT ETFs can help with diversification, but they should make up only a small part of a portfolio, she says. The ETF’s fee is at the higher end among its peers, but this fund is also easily tradeable, with a 30-day average trading volume of 425,000 shares, she says.
The pick: Vanguard Global ex-U.S. Real Estate ETF (VNQI-Nasdaq)
MER: 0.12 per cent
This REIT ETF is a low-cost way to generate stable income and help diversify a portfolio globally, says Ms. Tsang. “As an international equity REIT ETF, it is one of the cheapest funds in the category.” The distribution yield can often be higher for overseas real-estate ETFs than U.S.-focused property funds, she adds.
The ETF, which has US$6.6-billion in assets, offers a yield of 4.02 per cent. This fund holds more than 630 REITs and real estate companies. It also excludes U.S. securities and is heavily tilted toward Asia with about 22 per cent in Japan, 13.6 per cent in Hong Kong and 10 per cent in China.
Top holdings include Vonovia SE, Sun Hung Kai Properties Ltd. and Mitsubishi Estate Co. The risks depend on the country, she says; for instance, a slowdown in China’s economy could put pressure on Hong Kong’s growth prospects and housing market.